The Climate Bonds Initiative held roundtable discussions on Dec. 14, to look at how the covered bonds market can best be adapted for renewable energy finance.

Sean Kidney, Chair of Climate Bonds Initiative, said in a 2012 report on the subject said that covered bonds seem well suited to renewable energy and energy efficiency projects, given projects’ steady and inflation-linked income streams.

Kidney said in an e-mailed statement last Friday, that there have been no deals yet as regulatory proposals are still developing. A major hurdle for getting the market off the ground is the lack of historical financial data behind many low-carbon technologies. Kidney points out that most portfolio managers lack the expertise and experience in energy finance that currently resides in banks, and, for many bond investors, low-carbon finance is uncharted territory.

“For the bond market to open up as a supplementary source of capital for low-carbon economic transformation, bond investors first need to gain more experience of how established renewable energy assets, such as wind energy, perform,” said Kidney. “If a fully functioning corporate bond market for low-carbon finance is to emerge, ways must be found to bridge the gap that exists currently between existing triple-A rated, supranational guaranteed ‘climate’ bonds and the highly specialized ABS (asset-backed securities) sector.”

Covered bonds could provide a solution that would provide investor comfort for this new asset class and at the same time allow the asset class to build historical financial data.  

Covered bonds already have a wide investor audience because they provide a high level of security and typically attract strong credit ratings. This is achieved through a dual recourse structure, which in many countries is governed under a specific legal framework, and through additional safety features such as bankruptcy-remoteness. Bondholders have a preferential claim over the assets and associated cash flows in a dedicated ‘cover pool’, as well as an unsecured claim on the issuer to recover any shortfall. “Once specific reporting standards have been established, investors could gain experience in how renewable energy assets perform without having to take a direct credit exposure,”said Kidney.   

For investors, renewable energy covered bonds (RECBs) would broaden the range of investment grade financial instruments they can access; and  RECBs issuance would give buy-side analysts the experience of the financial performance of renewable energy assets without direct exposure to underlying credit risks.

Kidney said in his report that RECBs could be issued under existing legislation, so long as assets in the cover pool are wrapped or guaranteed by supranational or government entities.

The Climate Bonds Initiative’s new steering committee member, Sean Flannery, who was previously the corporate investment officer for the Americas at State Street Global Advisors – said that there is an important opportunity in the U.S. to develop Renewable Energy Covered Bonds. “So we'll do some work on the U.S. market issues in coming months,” he said.














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